<PAGE> 1
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST Two World Trade Center
LETTER TO THE SHAREHOLDERS April 30, 2000 New York, New York 10048
DEAR SHAREHOLDER:
During the six-month period ended April 30, 2000, the U.S. economy continued to
exhibit strong economic growth with accelerating inflationary pressures.
Concerned by the strength in the global economy and the threat of rising
inflation, the Federal Reserve Board continued its recent pattern of raising the
federal funds rate, increasing it to 6.00 percent in two steps during the
period. Subsequent to the end of the period, at its May meeting, the Fed raised
the federal funds rate an additional 50 basis points (one-half of one percent).
At year-end 1999 the Fed added substantial liquidity to the marketplace because
of Y2K concerns. This action in turn fueled the equity markets to new heights
while forcing interest rates to their highest levels in this economic cycle.
Then, in early 2000, the U.S. Treasury Department officially announced a buyback
program of long-dated Treasuries. Consequently, Treasury bonds rallied because
of the impending decrease in their supply.
Interest rates on long-term Treasuries were highly volatile during the period.
Thirty-year Treasuries ranged in yield between 5.67 percent and 6.75 percent. On
April 30, 2000, the 30-year Treasury bond was yielding 5.96 percent, compared to
6.16 percent six months earlier.
PERFORMANCE
For the six-month period ending April 30, 2000, Morgan Stanley Dean Witter
Federal Securities Trust's Class B shares produced a total return of 0.69
percent versus 2.25 percent for the Lehman Brothers U.S. Government Index.*
During the same period, the Fund's Class A, C and D shares posted total returns
of 1.09 percent, 0.71 percent and 0.99 percent, respectively. The performance of
the Fund's four share classes varies because of differing expenses. The total
return figures
---------------------
*The Lehman Brothers U.S. Government Index is a broad-based measure of all U.S.
government and U.S. Treasury securities. The index's total return does not
include fees, expenses or charges. The index is unmanaged and should not be
considered an investment.
<PAGE> 2
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
LETTER TO THE SHAREHOLDERS April 30, 2000, continued
given assume the reinvestment of all distributions but do not reflect the
deduction of any applicable sales charges.
In view of the rising interest rate environment and its potential effect on
long-term interest rates, the Fund's duration was reduced during the first
quarter of 2000. The Fund's shorter duration prevented it from participating
fully in the Treasury rally that followed the announcement of the buyback
program for long-dated Treasuries. As a result, the Fund underperformed for the
period relative to its benchmark.
PORTFOLIO STRATEGY
The Fund's average duration was increased to approximately 6.6 years as of April
30, 2000, in response to the belief that the U.S. economy would moderate,
inflation remain within acceptable norms for the Federal Reserve Board and the
Treasury buyback program would support investors' appetite for longer-maturity
Treasuries. As the year progresses, however, the average duration of the
portfolio may be modified should market conditions offer an incentive to enhance
the portfolio's income and its potential for total return. The Fund may also opt
to purchase additional mortgage-backed securities, which continue to offer not
only an incremental yield incentive over U.S. Treasury securities of similar
maturity but also the potential for attractive total returns. Investments may
also include additional positions in longer-dated U.S. Treasuries.
On April 30, 2000, the Fund had net assets in excess of $489 million, with
approximately 59 percent of the portfolio invested in Treasury notes and bonds,
25 percent in mortgage-backed securities and 12 percent in U.S. government
agency obligations. The balance of the portfolio consisted of short-term money
market investments.
LOOKING AHEAD
We believe that U.S. economic growth is likely to moderate later in the year
with inflation remaining at acceptable levels. However, should the economy
continue to display inordinately strong growth coupled with accelerating
inflation, the Fed may feel it needs to take a more aggressive stance on
monetary policy. Adjustments to the Fund's maturity and portfolio composition
will be made accordingly as conditions warrant and attractive opportunities
become available.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
LETTER TO THE SHAREHOLDERS April 30, 2000, continued
We appreciate your ongoing support of Morgan Stanley Dean Witter Federal
Securities Trust and look forward to continuing to serve your investment needs.
<TABLE>
<S> <C>
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FUND PERFORMANCE April 30, 2000
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A*
----------------------------------------------
<S> <C> <C>
PERIOD ENDED 4/30/00
-------------------------
Since Inception (7/28/97) 4.96%(1) 3.32%(2)
1 Year 0.47%(1) (3.80)%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C++
----------------------------------------------
<S> <C> <C>
PERIOD ENDED 4/30/00
-------------------------
Since Inception (7/28/97) 4.04%(1) 4.04%(2)
1 Year (0.77)%(1) (1.70)%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS B+
----------------------------------------------
<S> <C> <C>
PERIOD ENDED 4/30/00
-------------------------
1 Year (0.93)%(1) (5.58)%(2)
5 Years 5.53%(1) 5.22%(2)
10 Years 6.84%(1) 6.84%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS D#
----------------------------------------------
<S> <C> <C>
PERIOD ENDED 4/30/00
-------------------------
Since Inception (7/28/97) 4.52%(1)
1 Year 0.00%(1)
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COSTS.
---------------------
<TABLE>
<S> <C>
(1) Figure shown assumes reinvestment of all distributions and
does not reflect the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and
the deduction of the maximum applicable sales charge. See
the Fund's current prospectus for complete details on fees
and sales charges.
* The maximum front-end sales charge for Class A is 4.25%.
+ The maximum contingent deferred sales charges (CDSC) for
Class B is 5.0%. The CDSC declines to 0% after six years.
++ The maximum CDSC for Class C shares is 1% for shares
redeemed within one year of purchase.
# Class D shares have no sales charge.
</TABLE>
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
--------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (71.1%)
U.S. Government Agencies (11.6%)
$ 12,000 Federal Home Loan Banks 07/02/12................. 0.00 % $ 4,615,320
4,400 Federal National Mortgage Assoc. 09/25/07........ 6.85 4,197,864
5,000 Federal National Mortgage Assoc. 12/24/07........ 6.48 4,696,150
78,000 Resolution Funding Strip 07/15/07 - 10/15/09..... 0.00 43,481,740
------------
56,991,074
------------
U.S. Treasury Bonds (57.9%)
20,000 08/15/29......................................... 6.125 20,044,200
10,000 08/15/22......................................... 7.25 11,169,000
20,000 11/15/15+........................................ 9.875 26,873,000
22,000 11/15/12......................................... 10.375 26,779,500
117,600 08/15/13++....................................... 12.00 157,132,416
30,000 11/15/11......................................... 14.00 41,455,200
------------
283,453,316
------------
U.S. Treasury Note (0.9%)
5,000 11/15/08......................................... 4.75 4,466,550
------------
U.S. Treasury Strip (0.7%)
5,000 02/15/07......................................... 0.00 3,230,400
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Identified Cost $356,728,109)............................. 348,141,340
------------
MORTGAGE-BACKED SECURITIES (25.1%)
Federal Home Loan Mortgage Corp. (3.1%)
9,925 10/01/10 - 02/01/20.............................. 9.50 10,381,069
3,570 09/01/15 - 10/01/19.............................. 10.00 3,767,395
914 02/01/16 - 10/01/18.............................. 10.50 991,884
------------
15,140,348
------------
Federal National Mortgage Assoc. (5.6%)
8,909 03/01/28 - 08/01/28.............................. 6.00 8,065,057
1,723 06/01/26 - 12/01/26.............................. 7.50 1,685,447
4,734 05/01/24 - 06/01/25.............................. 8.00 4,725,275
10,000 *................................................ 8.00 9,965,625
2,106 01/01/22 - 04/01/25.............................. 8.50 2,135,199
716 09/01/16 - 05/01/20.............................. 9.50 750,760
68 03/01/16 - 02/01/18.............................. 9.75 72,124
------------
27,399,487
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
--------------------------------------------------------------------------------------
<C> <S> <C> <C>
Government National Mortgage Assoc. (10.9%)
$ 18,099 08/15/25 - 05/15/29.............................. 6.50 % $ 16,962,389
20,757 12/15/22 - 05/15/24.............................. 7.00 19,965,782
9,769 06/15/17 - 08/15/29.............................. 7.50 9,601,526
5,969 10/15/19 - 10/15/24.............................. 8.50 6,075,229
442 05/15/16 - 11/15/20.............................. 10.00 472,933
38 09/15/18......................................... 11.00 42,300
------------
53,120,159
------------
Government National Mortgage Assoc. II (5.5%)
9,402 01/20/29 - 02/20/29.............................. 6.50 8,773,175
18,865 12/20/28 - 06/20/29.............................. 7.00 18,057,015
------------
26,830,190
------------
TOTAL MORTGAGE-BACKED SECURITIES
(Identified Cost $125,981,527)............................. 122,490,184
------------
SHORT-TERM INVESTMENT (a) (4.1%)
U.S. GOVERNMENT AGENCY
20,200 Federal Home Loan Mortgage Corp. 05/01/00
(Identified Cost $20,200,000).................... 5.88 20,200,000
------------
TOTAL INVESTMENTS (Identified Cost $502,909,636)........... 490,831,524
------------
</TABLE>
<TABLE>
<CAPTION>
DESCRIPTION,
NUMBER OF EXPIRATION DATE
CONTRACTS AND STRIKE PRICE
--------- ----------------
<C> <S> <C> <C>
WRITTEN OPTIONS (b) (0.0%)
Call options on Treasury bond futures
100 June/2000/95................................................ (32,812)
500 June/2000/96................................................ (312,500)
------------
TOTAL WRITTEN OPTIONS
(Premiums Received $372,050)...................... (345,312)**
------------
TOTAL INVESTMENTS
(Identified Cost $502,909,636) (c)................ 100.3% 490,831,524
TOTAL WRITTEN OPTIONS OUTSTANDING................. (0.1) (345,312)
LIABILITIES IN EXCESS OF OTHER ASSETS............. (0.2) (908,031)
----- ------------
NET ASSETS........................................ 100.0% $489,578,181
===== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS April 30, 2000 (unaudited) continued
---------------------
+ A portion of this security is segregated in connection with open written
options.
++ A portion of this security is segregated in connection with a security
purchased on a forward commitment basis.
* Security was purchased on a forward commitment basis with an approximate
principal amount and no definite maturity date; the actual principal amount
and maturity date will be determined upon settlement.
** The market value of U.S. Treasury securities pledged to cover written
options on futures contracts is $968,413.
(a) Purchased on a discount basis. The interest rate shown has been adjusted to
reflect a money market equivalent yield.
(b) Options expire one month prior to the expiration date indicated for Treasury
bond futures.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $6,325,238 and the
aggregate gross unrealized depreciation is $18,403,350, resulting in net
unrealized depreciation of $12,078,112.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2000 (unaudited)
ASSETS:
Investments in securities, at value (identified cost
$502,909,636).............................................. $490,831,524
Cash........................................................ 88,831
Receivable for:
Interest................................................ 8,369,581
Shares of beneficial interest sold...................... 2,125,810
Principal paydowns...................................... 170,291
Prepaid expenses and other assets........................... 51,550
------------
TOTAL ASSETS............................................ 501,637,587
------------
LIABILITIES:
Written call options outstanding, at value (premiums
received $372,050)......................................... 345,312
Payable for:
Investment purchased.................................... 10,028,889
Shares of beneficial interest repurchased............... 609,718
Dividends and distributions to shareholders............. 352,694
Plan of distribution fee................................ 343,739
Investment management fee............................... 226,175
Accrued expenses and other payables......................... 152,879
------------
TOTAL LIABILITIES....................................... 12,059,406
------------
NET ASSETS.............................................. $489,578,181
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $547,805,663
Net unrealized depreciation................................. (12,051,374)
Accumulated net realized loss............................... (46,176,108)
------------
NET ASSETS.............................................. $489,578,181
============
CLASS A SHARES:
Net Assets.................................................. $3,875,245
Shares Outstanding (unlimited authorized, $.01 par value)... 441,497
NET ASSET VALUE PER SHARE............................... $8.78
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value)........ $9.17
============
CLASS B SHARES:
Net Assets.................................................. $472,111,578
Shares Outstanding (unlimited authorized, $.01 par value)... 54,586,296
NET ASSET VALUE PER SHARE............................... $8.65
============
CLASS C SHARES:
Net Assets.................................................. $ 9,635,485
Shares Outstanding (unlimited authorized, $.01 par value)... 1,104,315
NET ASSET VALUE PER SHARE............................... $8.73
============
CLASS D SHARES:
Net Assets.................................................. $3,955,873
Shares Outstanding (unlimited authorized, $.01 par value)... 458,215
NET ASSET VALUE PER SHARE............................... $8.63
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended April 30, 2000 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 20,800,316
------------
EXPENSES
Plan of distribution fee (Class B shares)................... 2,129,026
Plan of distribution fee (Class C shares)................... 44,040
Investment management fee................................... 1,430,314
Transfer agent fees and expenses............................ 245,921
Professional fees........................................... 52,349
Shareholder reports and notices............................. 39,640
Custodian fees.............................................. 38,660
Registration fees........................................... 37,373
Trustees' fees and expenses................................. 8,630
Other....................................................... 1,594
------------
TOTAL EXPENSES.......................................... 4,027,547
------------
NET INVESTMENT INCOME................................... 16,772,769
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/loss on:
Investments............................................. 1,933,025
Future contracts........................................ (3,953,371)
Options written......................................... 468,450
------------
NET LOSS................................................ (1,551,896)
Net change in unrealized appreciation....................... (12,503,365)
------------
NET LOSS................................................ (14,055,261)
------------
NET INCREASE................................................ $ 2,717,508
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
APRIL 30, ENDED
2000 OCTOBER 31, 1999
<CAPTION>
--------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $16,772,769 $ 36,412,647
Net realized gain (loss)............................. (1,551,896) 2,435,567
Net change in unrealized appreciation................ (12,503,365) (58,286,121)
------------ ------------
NET INCREASE (DECREASE).......................... 2,717,508 (19,437,907)
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares....................................... (158,765) (328,982)
Class B shares....................................... (16,118,757) (35,383,489)
Class C shares....................................... (332,554) (502,451)
Class D shares....................................... (162,693) (197,725)
------------ ------------
TOTAL DIVIDENDS.................................. (16,772,769) (36,412,647)
------------ ------------
Net decrease from transactions in shares of
beneficial interest................................. (58,140,239) (35,642,483)
------------ ------------
NET DECREASE..................................... (72,195,500) (91,493,037)
NET ASSETS:
Beginning of period.................................. 561,773,681 653,266,718
------------ ------------
END OF PERIOD.................................... $489,578,181 $561,773,681
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Federal Securities Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund's investment
objective is to earn a high level of current income. The Fund commenced
operations on March 31, 1987. On July 28, 1997, the Fund converted to a multiple
class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) all portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (2) listed options
are valued at the latest sale price on the exchange on which they are listed
unless no sales of such options have taken place that day, in which case they
are valued at the mean between their latest bid and asked price; (3) futures
contracts are valued at the latest sale price as of the close of the commodities
exchange on which it trades unless the Trustees determine that such price does
not reflect their market value, in which case it will be valued at fair value as
determined by the Trustees; (4) when market quotations are not readily
available, including circumstances under which it is determined by Morgan
Stanley Dean Witter Advisors Inc. (the "Investment Manager"), that the sale or
bid prices are not reflective of a security's market value, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Trustees (valuation of
debt securities for which market quotations are not readily available may be
based upon current market prices of securities which are comparable in coupon,
rating and maturity or an appropriate matrix utilizing similar factors); and (5)
short-term debt securities having a maturity date of more than sixty days at the
time of purchase are valued on a mark-to-market basis until sixty
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
days prior to maturity and thereafter at amortized cost based on their value on
the 61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. OPTIONS AND FUTURES -- (1) Written options on debt obligations: When the Fund
writes a call or put option, an amount equal to the premium received is included
in the Fund's Statement of Assets and Liabilities as a liability which is
subsequently marked-to-market to reflect the current market value. If a written
option either expires or the Fund enters into a closing purchase transaction,
the Fund realizes a gain or loss without regard to any unrealized gain or loss
on the underlying security and the liability related to such option is
extinguished. If a written call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such sale
are increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of the
security which the Fund purchases upon exercise of the option; (2) Purchased
options on debt obligations: When the Fund purchases a call or put option, the
premium paid is recorded as an investment which is subsequently marked-to-market
to reflect the current market value. If a purchased option expires, the Fund
will realize a loss to the extent of the premium paid. If the Fund enters into a
closing sale transaction, a gain or loss is realized for the difference between
the proceeds from the sale and the cost of the option. If a put option is
exercised, the cost of the security sold upon exercise will be increased by the
premium originally paid. If a call option is exercised, the cost of the security
purchased upon exercise will be increased by the premium originally paid; (3)
Options on futures contracts: The Fund is required to deposit cash, U.S.
Government securities or other liquid portfolio securities as "initial margin"
and "variation margin" with respect to written call and put options on futures
contracts. If a written option expires, the Fund realizes a gain. If a written
call or put option is exercised, the premium received will decrease or increase
the unrealized loss or gain on the futures contract. If the Fund enters into a
closing purchase transaction, the Fund realizes a
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
gain or loss without regard to any unrealized gain or loss on the underlying
futures contract and the liability related to such option is extinguished; (4)
Futures contracts: A futures contract is an agreement between two parties to buy
and sell financial instruments at a set price on a future date. Upon entering
into such a contract, the Fund is required to pledge to the broker cash, U.S.
Government securities or other liquid portfolio securities equal to the minimum
initial margin requirements of the applicable futures exchange. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in the value of the contract. Such receipts or
payments known as variation margin are recorded by the Fund as unrealized gains
or losses. Upon closing of the contract, the Fund realizes a gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed.
E. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
following annual rates to the Fund's net assets determined at the close of each
business day: 0.55% to the portion of daily net assets not exceeding $1 billion;
0.525% to the portion of daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.50% to the portion of daily net assets exceeding $1.5 billion
but not exceeding
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
$2 billion; 0.475% to the portion of daily net assets exceeding $2 billion but
not exceeding $2.5 billion; 0.45% to the portion of daily net assets exceeding
$2.5 billion but not exceeding $5 billion; 0.425% to the portion of daily net
assets exceeding $5 billion but not exceeding $7.5 billion; 0.40% to the portion
of daily net assets exceeding $7.5 billion but not exceeding $10 billion; 0.375%
to the portion of daily net assets exceeding $10 billion but not exceeding $12.5
billion; and 0.35% to the portion of daily net assets exceeding $12.5 billion.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net
assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$20,088,920 at April 30, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
months ended April 30, 2000, the distribution fee was accrued for Class C shares
at the annual rate of 0.85%.
The Distributor has informed the Fund that for the six months ended April 30,
2000, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $393, $250,705
and $6,189, respectively and received $7,271 in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such charges
which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Purchases and sales/prepayments of portfolio securities, excluding short-term
investments, for the six months ended April 30, 2000 were $41,289,063 and
$112,580,557, respectively.
Transactions in written options for the six months ended April 30, 2000 were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUMS
--------- -----------
<S> <C> <C>
Option contracts written, outstanding at beginning of the
period..................................................... 500 $ 194,541
Options written............................................. 4,100 2,092,346
Options closed.............................................. (2,117) (1,022,411)
Options exercised........................................... (1,423) (749,614)
Options expired............................................. (460) (142,812)
------ -----------
Option contracts written, outstanding at end of the
period..................................................... 600 $ 372,050
====== ===========
</TABLE>
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At April 30, 2000, the Fund had
transfer agent fees and expenses payable of approximately $7,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended April 30, 2000
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,906. At April 30, 2000, the Fund had an accrued pension liability of
$52,990 which is included in accrued expenses in the Statement of Assets and
Liabilities.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2000 OCTOBER 31, 1999
--------------------------- ---------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold...................................................... 1,700,045 $ 15,017,526 763,352 $ 7,174,821
Reinvestment of dividends................................. 13,760 121,517 28,765 269,255
Redeemed.................................................. (1,746,276) (15,376,108) (817,775) (7,604,223)
----------- ------------- ----------- -------------
Net decrease - Class A.................................... (32,471) (237,065) (25,658) (160,147)
----------- ------------- ----------- -------------
CLASS B SHARES
Sold...................................................... 11,228,645 97,803,496 11,015,098 101,346,580
Reinvestment of dividends................................. 1,058,152 9,195,424 2,189,665 20,178,753
Redeemed.................................................. (18,656,196) (162,335,816) (17,981,486) (165,348,233)
----------- ------------- ----------- -------------
Net decrease - Class B.................................... (6,369,399) (55,336,896) (4,776,723) (43,822,900)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold...................................................... 218,997 1,931,742 1,002,507 9,285,620
Reinvestment of dividends................................. 24,011 210,542 38,573 357,523
Redeemed.................................................. (366,841) (3,216,226) (548,291) (5,132,935)
----------- ------------- ----------- -------------
Net increase (decrease) - Class C......................... (123,833) (1,073,942) 492,789 4,510,208
----------- ------------- ----------- -------------
CLASS D SHARES
Sold...................................................... 5,982,644 52,176,418 1,612,081 14,224,809
Reinvestment of dividends................................. 12,674 109,798 17,692 161,340
Redeemed.................................................. (6,168,191) (53,778,552) (1,200,596) (10,555,793)
----------- ------------- ----------- -------------
Net increase (decrease) - Class D......................... (172,873) (1,492,336) 429,177 3,830,356
----------- ------------- ----------- -------------
Net decrease in Fund...................................... (6,698,576) $ (58,140,239) (3,880,415) $ (35,642,483)
=========== ============= =========== =============
</TABLE>
6. FEDERAL INCOME TAX STATUS
At October 31, 1999, the Fund had a net capital loss carryover of approximately
$38,054,000 which may be used to offset future capital gains to the extent
provided by regulations, which is available through October 31 in the following
years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
------------------------------------------------------
2000 2002 2004 2007
--------------------- -------- -------- --------
<S> <C> <C> <C>
$3,854 $31,124 $690 $2,386
====== ======= ==== ======
</TABLE>
At October 31, 1999, the Fund was required for Federal income tax purposes to
defer approximately $6,247,000 of realized losses on certain closed options and
futures contracts.
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 2000 (unaudited) continued
As of October 31, 1999, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on straddles.
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
To hedge against adverse interest rate and market risks on portfolio positions
or anticipated positions in U.S. Government securities, or in the case of
written options, to close out long or short positions in futures contracts, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative instruments").
These derivative instruments involve elements of market risk in excess of the
amount reflected in the Statement of Assets and Liabilities. The Fund bears the
risk of an unfavorable change in the value of the underlying securities.
At April 30, 2000, the Fund had outstanding written options on interest rate
futures.
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
APRIL 30, 2000 OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................ $9.01 $9.79 $9.45 $9.26
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income.............................. 0.33 0.62 0.64 0.16
Net realized and unrealized gain (loss)............ (0.23) (0.78) 0.34 0.19
----- ----- ----- -----
Total income (loss) from investment operations...... 0.10 (0.16) 0.98 0.35
----- ----- ----- -----
Less dividends from net investment income........... (0.33) (0.62) (0.64) (0.16)
----- ----- ----- -----
Net asset value, end of period...................... $8.78 $9.01 $9.79 $9.45
===== ===== ===== =====
TOTAL RETURN+....................................... 1.09%(1) (1.66)% 10.75% 3.78%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ 0.71%(2)(3) 0.91 %(3) 0.93%(3) 0.92%(2)
Net investment income............................... 7.27%(2)(3) 6.65 %(3) 6.70%(3) 6.60%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............. $3,875 $4,272 $4,894 $2,051
Portfolio turnover rate............................. 8%(1) 17 % 13% 12%
</TABLE>
---------------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ----------------------------------------------------------------
APRIL 30, 2000 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period....... $8.87 $9.72 $9.36 $9.25 $9.49 $8.74
----- ----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income..................... 0.28 0.55 0.58 0.59 0.59 0.59
Net realized and unrealized gain (loss)... (0.22) (0.85) 0.36 0.11 (0.25) 0.75
----- ----- ----- ----- ----- -----
Total income (loss) from investment
operations................................ 0.06 (0.30) 0.94 0.70 0.34 1.34
----- ----- ----- ----- ----- -----
Less dividends from net investment
income.................................... (0.28) (0.55) (0.58) (0.59) (0.58) (0.59)
----- ----- ----- ----- ----- -----
Net asset value, end of period............. $8.65 $8.87 $9.72 $9.36 $9.25 $9.49
===== ===== ===== ===== ===== =====
TOTAL RETURN+.............................. 0.69%(1) (3.09)% 10.35% 7.89% 3.79% 15.89%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................... 1.56%(2)(3) 1.55%(3) 1.54%(3) 1.53% 1.53% 1.52%
Net investment income...................... 6.42%(2)(3) 6.01%(3) 6.09%(3) 6.41% 6.31% 6.53%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.... $472,112 $540,916 $639,212 $623,049 $719,935 $829,244
Portfolio turnover rate.................... 8%(1) 17% 13% 12% 10% 7%
</TABLE>
---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE> 20
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
APRIL 30, 2000 OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................. $8.95 $9.80 $9.44 $9.26
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income............................... 0.28 0.56 0.58 0.15
Net realized and unrealized gain (loss)............. (0.22) (0.85) 0.36 0.18
----- ----- ----- -----
Total income (loss) from investment operations....... 0.06 (0.29) 0.94 0.33
----- ----- ----- -----
Less dividends from net investment income............ (0.28) (0.56) (0.58) (0.15)
----- ----- ----- -----
Net asset value, end of period....................... $8.73 $8.95 $9.80 $9.44
===== ===== ===== =====
TOTAL RETURN+........................................ 0.71%(1) (3.03)% 10.30% 3.54%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. 1.56%(2)(3) 1.55 %(3) 1.54%(3) 1.52%(2)
Net investment income................................ 6.42%(2)(3) 6.01 %(3) 6.09%(3) 5.86%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.............. $9,635 $10,995 $7,204 $721
Portfolio turnover rate.............................. 8%(1) 17 % 13% 12%
</TABLE>
---------------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE> 21
MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
APRIL 31, 2000 OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
-------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................. $8.86 $9.69 $9.33 $9.26
----- ----- ----- ------
Income (loss) from investment operations:
Net investment income............................... 0.32 0.63 0.66 0.17
Net realized and unrealized gain (loss)............. (0.23) (0.83) 0.36 0.07
----- ----- ----- ------
Total income (loss) from investment operations....... 0.09 (0.20) 1.02 0.24
----- ----- ----- ------
Less dividends from net investment income............ (0.32) (0.63) (0.66) (0.17)
----- ----- ----- ------
Net asset value, end of period....................... $8.63 $8.86 $9.69 $9.33
===== ===== ===== ======
TOTAL RETURN+........................................ 0.99%(1) (2.08)% 11.30% 2.62%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. 0.71%(2)(3) 0.70 %(3) 0.69%(3) 0.63%(2)
Net investment income................................ 7.27%(2)(3) 6.86 %(3) 6.94%(3) 6.40%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.............. $3,956 $5,590 $1,956 $69
Portfolio turnover rate.............................. 8%(1) 17 % 13% 12%
</TABLE>
---------------------
* The date shares were first issued.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE> 22
(This Page Intentionally Left Blank)
<PAGE> 23
(This Page Intentionally Left Blank)
<PAGE> 24
TRUSTEES
----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
----------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Rajesh K. Gupta
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
----------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
----------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
----------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of the
Fund without examination by the independent accountants and accordingly they
do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of
the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus. Read the
prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
FEDERAL
SECURITIES TRUST
[PHOTO]
Semiannual Report
April 30, 2000
